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Common Mistakes Homebuyers Make When Applying for Mortgages and What to Look for In Your First Mortgage

Buying a home is often the largest purchase Canadians will make in their lives. And a mortgage is often their largest debt.

The decision to buy a home and take on a mortgage shouldn’t be made quickly, yet many homebuyers rush into buying the first home they fall in love with without doing their homework first. As a result, they risk becoming house poor and regretting their decision.

Avoid making these costly mistakes when applying for a mortgage, and consider these tips for first-time homebuyers and those looking to refinance their mortgage.

Not Checking Your Credit Score

Poor credit due to an error with your credit score could lead to higher mortgage rates or a loan rejection.

Check your credit reports online every six months to a year before applying for a mortgage. This will give you time to address any errors, ensuring they’re corrected, and to make the necessary changes to improve your credit score. You can monitor your credit via Equifax Canada or Transunion Canada.

For example, paying down a line of credit or credit card balance so the balance is less than 70% of the limit can help improve your credit score.

Not Saving Enough for a Down Payment

The minimum down payment you can make is 5 percent of the purchase price. Therefore, if you want to buy a $300,000 home, you will need at least $15,000 plus closing cost.

If you make a down payment of less than 20 percent on a home, you will have to pay mortgage default insurance with CMHC, Genworth, or Canada Guaranty. This default insurance can cost tens of thousands of dollars, an added cost on top of your mortgage. This means that, monthly, your cost of borrowing and your monthly payments can easily increase by over $100 per month. This adds up to thousands of dollars over the life of your mortgage.

Mortgage insurance protects the lender in case you default on your mortgage, not you. To save yourself from steeper interest payments on your mortgage, save at least 20 percent of the purchase price for a down payment. That might seem steep, but if you’re a first-time homebuyer, you can use up to $25,000 in RRSP savings (or $50,000 for a couple) for a down payment under the Home Buyers’ Plan.

Not Budgeting for All the Costs of Home Ownership

Getting pre-approved for a mortgage is the first step to finding out how much you can afford for a home. But it’s important to note that this pre-approval only considers what you can afford to pay for your mortgage and property expenses. It doesn’t account for the cost of repairs, renovations, and other household expenses.

Creating a realistic budget for your net income can help you keep things in perspective for your home. Include:

Mortgage costs

Property taxes

Maintenance and repair costs (expect to pay about 1% to 2% of your home’s purchase price each year)

Home insurance

Utilities

Car payments

Other household expenses, such as furnishing costs for your new home

Once you’ve accounted for the costs of living in your budget, see how much you have left each month. If it isn’t enough to do much, like save for a trip, retirement, or your kids’ education, then you risk becoming house poor.

You also have to consider what your budget would look like if mortgage rates went up. Would you even be able to afford higher mortgage payments in the future?

Not Shopping Around

While you might be tempted to go with the first place that offers a low interest rate, you need to consider:

All aspects of a mortgage

The overall cost of home ownership

The price of the house

Type of mortgage

The amortization period

Pre-payment options and penalties if you want to pay off your mortgage faster

Talk to your bank – but don’t stop there. It is important to compare products based not only on the lowest rates, but on the best overall product for your situation. You can also take the time to calculate a payment schedule.

Note: If you’re not comfortable making these comparisons, calculations, and introductions to other lenders, working with a reliable mortgage broker is a must. They’ll help you navigate the mortgage process from start to finish.

If you choose a shorter amortization period, you’ll pay off your mortgage sooner and save plenty on interest. On the other hand, choosing a longer amortization period keeps your monthly mortgage payments lower, and you’ll have more money leftover each month.

Short amortization periods are great if you have strong financial discipline and can help you get out of debt sooner. On the other hand, they can put a strain on your monthly budget. Long amortization means you’re paying more interest overall, but have a bit more money to work with month-to-month. They also help minimize risk in the event you lose a job or other financial emergencies arise.

Not Locking Down a Mortgage Rate

When you do find the best mortgage product and rate for your situation, get the lender or broker to guarantee in writing how long they will hold it.

You may also have the option to lock a fixed rate mortgage or you could potentially choose a variable interest rate when you apply for a mortgage. If you’re concerned about the rates going up, you can lock the interest rate. But make sure you understand both options when deciding on a mortgage product. There are pros and cons to both types of products.

Not Knowing if You Actually Qualify

A pre-approval confirms how much of a mortgage loan you can qualify for.

You won’t know for certain if you qualify for a loan until you apply for a pre-approval. This application process includes submitting proof of income, proof of down payment and for the lender or mortgage broker to verify your credit.

Not Accounting for Closing Costs

When budgeting for your new home, remember to include closing costs. Expect to pay about 1.5 to 2.5 percent of the home’s purchase price for:

A home inspection

Property insurance

Legal fees

Land transfer tax

Property tax

Moving costs

Utility hook-ups

What You Need to Know About Your First Mortgage

When applying for a mortgage, you must first figure out how much you are approved for. This will determine the amount of the loan and ultimately, the value of the house you can buy.

And if you borrow from a federally-regulated financial institution, you will also have to pass a mortgage stress test. This determines if you can afford to pay for your mortgage if interest rates rise.

Why Work with a Broker?

A mortgage broker can help you throughout the entire mortgage application process, from determining how much you can actually afford to shopping and negotiating for the best mortgage product for you.

Whether you’re a first-time homebuyer or looking to refinance your mortgage, your mortgage broker will make sure you don’t make any of the mistakes homebuyers make when applying for mortgages. A mortgage broker will work with you to secure a mortgage and buy a home that you can afford today and in the future.